Cornerstone Global Associates

Spain: the unseen multiplier to Greek political risk

Posted by: msomos on: November 4, 2011

Since yesterday, markets around the world have been breathing premature sighs of relief. If Papandreou falls, and elections are called to around late November, it'll coincide with, or shortly follow, the Spanish elections of 20 November. Spain posted 21.52 per cent unemployment last week, the highest in the industrialised world. It is unlikely that the new Spanish government, which may even get absolute parliamentary majority, will be able to keep its electoral pledge to boost job creation and cut spending, and also honour its commitment to cut Spain's deficit from 9.3 per cent of the GDP last year to 6.0 this year, 4.4 per cent in 2012 and 3.0 per cent in 2003. Spain has a significantly larger economy than Greece, with a GDP of over one trillion euros in 2010 (more than three times the Greek), and a labour force of more than 23 million (compared with Greece's 5 million.) The new Spanish government's first measures, and the inevitable renegotiation with the EU, will take place in the shadow of the Greek crisis – perhaps simultaneously with renegotiations with a new Greek government. If Spain's Popular Party shows that it is unable to keep the deficit reduction pledge despite its best efforts, it will seem responsible; if not, it can blame eight years of Socialist rule. In either case, EU leaders will be hard put to blame Spanish economic woes on bad leadership, as they do with Greece. The media will point out that despite the differences in individual EU members' leadership and success in juggling economic and political priorities, domestic economic crises, and their EU-wide and global ripple-effects, the two countries' troubles point to systemic and deep-running flaws in the EU as an on-going project. By the end of this month, the roller coaster ride of the last two weeks may seem like a lullaby; yesterday's and today's market exuberance will certainly prove irrational.

Summary: Yesterday's and today's market optimism and the dearth of discussion about the Greek-Spanish political risk multiplier suggest that the market has not yet priced in the short-term effects of the Spanish election later this month, including the announcement of inevitably anemic austerity measures and probable deficit cut renegotiations with the EU.

Recommendation: Selling at a profit while the mood is optimistic – which may not last much longer – is obvious advice. Later this month a range of undervalued European financial products could become available.

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